Briefing

Interview with the Chairman of the FSC on Bloomberg TV, 21 October, 2008

October 22, 2008

Kwang Woo Jun, Chairman of the Financial Services Commission, discussed the main issues affecting Korea as a result of the economic global credit crunch during an interview with Bloomberg TV on 21 October, 2008, in Seoul

Q: I’m Bernard Lo in Hong Kong. Our guest today is the chairman of South Korean Financial Services Commission of FSC, Jun, Kwang-Woo. There went through weeks of hand ringing, the current sea is inspired into deep sea scuba dive Stocks were shred it and the banks are basing on capital squeeze, the worldwide financial crisis suspired no one and here in Asia. Republic of South Korea has pulled out the stops and amounted 130 U.S. dollars offensive. As weeks started so announce it faced in 30 billion injections of U.S. dollars into banks. For the next 3 years, the government is guaranteeing their overseas U.S. dollars borrowings trying to tide over the institutions. Let’s say, take it up for our guest for the day, the chairman, Once again, FSC, Jun Kwang-Woo joined us from Seoul today. Mr. Jun, welcome to the program. First of all, 100 or 130 billion dollar programs, are you 100% sure this is going to do the trick, is it going to work, sir?

A: Well, I’m quite confident that our new measures will bring about the kind of effect that we expect. You know, over the last months, turn of events following the Lehman bankruptcy filing has created enormous turmoil in the world financial market. Korean government has decided to pursue wait timely targeted temporary measures to shore up our banking sector, and sustained the health of our financial system.

Q: The credit upset, it was long and a little bit long in coming, at least, the initial 15 billion dollars, it’s sort of baby stock program didn’t do the track The benefit of Hansen should this package have been enacted sooner. Did it parallel of a country to wait so long?

A: There are different ways to look at the situation. I think our decision was very well-timed, because, first of all, it’s part of G20 concerted efforts. The lead during World Bank and IMF annual meeting, and also it is always good to have pre-emptive measures in hands. But at the same time, we have to be a bit careful about overshooting. So what I’m saying here is that the kind of measures, 130 billion as you mentioned, 100 billion of bank guarantees and 30 billion liquidity injections into the market should be considered very timely. Because, in overall, Korean banking system and sectors of whole stand reasonably well. So we did that only when we felt it’s quite needed.

Q: Well, Mr. Jun. President Lee Myung-Bak says the current crisis seeing around is worse than 10 years ago when your country had been bailed out by IMF. You can call with that and what we assurance is would you offer to the market at this point that you better equipped to handle that problems this time than you were 10 years ago.

A: We are a lot better equipped than 10 years ago in many respects. Let me give you some specific examples like, for example, corporate sector, now their competitiveness is way high compared to 10 years ago in terms of their profitability, in terms of their international competitiveness, more importantly in terms of their debt ratio. Average debt ratio of large corporations in Korea now stands below 100 %. That was comparable figure was more than 400 % 10 years ago. So we can see the difference there. And also, the banking sector soundness can be a huge difference compared to 10 years ago. Like BIS ratios amongst Korean banks is now somewhere between 11 and 12%, close to comparable figures at advanced countries. And PR ratio, showing the asset quality, which stands only around 6.7% which was as high as about 6%, 10 times larger than 10 years ago. So there was huge difference. On top of that, in terms of foreign exchange reserves, it was almost depleted at the time of Asian Financial crisis 11 years ago. Now it’s the 6th largest in the world amounting to somewhere around 230 billion dollars. So all in all, there’s huge difference there’s no reason to be worry too much about the official price back then the current state of this Korean economic affairs. There’s big difference, the external environment obviously we have to face to hear. During the financial crisis, global economic environment is rather not benign, whereas now these huge shocks are coming from global scene, so the external shocks are the main difference between now and then. But now what I am saying is we are much more capable dealing with these external shocks.

Q: Ok. So you agree or disagree with this,, president Lee then, that is worse than IMF bail-out days?

A: Right, when he was referring, our president was referring to, and when he was talking about the difficulty we face now even more so than 10 years ago. He was referring to that very challenging global economic environment. Because of that, we have to face off, strengthen our measures to cope with it.

Q: How that thought? More with the South Korea chairman of the Financial Services Commission, Jun-Kwang-Woo, and the ‘Voices’ continue.

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A: Thanks for watching to the ‘Voices’. The global financial chaos is not spared in Asia, South Korea out of block early in the week, 130 billion bank guarantee put it in extension for attempt to try to tide the banks over. This is going to short-term as is in the case of all these things in the future. Anytime, any kind of bail-out and any kind of assistance programs, the critiques do abound what some of the critiques are saying that the South Korea is prescription is potential moral hazard which is ingrained into this. The government guarantee exceeds by about 20 billion U.S. dollars equivalent for the short-term debt that the banks have to roll-over between now and June. Also the structure of the program has been bigger, your foreign current debt, your current foreign debt in overseas the bigger the piece of the pie you’re going to get. We’re joined us once again, from South Korea the chairman of the Financial Services Commission, Jun Kwang-Woo. Mr. Jun, how do you about it, that’s not the only criticism that, you know, when the European and U.S. started off their whole process, it’s going to more passive liquidity injection program then ended up taking direct states in banks. This has been sort of a round too. Number 1, the fact that those structures put in Korean extort spend rather than contract and streamline. Number 2, you know whether not South Korea ends up do the same as Britain and America, could you just tell us, sir?

A: Well, on the first part of your question, whether this creates an environment where banks even further expand their operation creating kind of moral hazard in situation. I don’t think I can agree to that view because essentially what we are doing here is we provide guarantees and liquidity injection to support the ordinary and sustained operations rather than to support expanded operation on the part of commercial banks. That’s not exactly what is intended. What we’re trying to do is to provide liquidity through banking system and the users. And also users meaning here corporate and individuals,,, and also the meet the obligations without any problems. As always any government assistant programs entails some level of moral hazards, but in this case, on light, for example, direct capital injection into the banks it’s a different kind. I think it is moral hazard component is relatively small. Even so when we have our guarantee fee charged to the government guarantees, we certainly levied certain amount of fees that is to compensate for that.

Q: And the second part of the question, what if a new environment pops up in time where the only way to fix the problem? Because liquidity is not doing the track exactly do direct state of. Acquisitions in these banks.

A: As I mentioned earlier, we always have to think about in this very volatile and unpredictable global economic environment. We have to thinks about the last result or the contingency plans to protect the banking sector for that matter economy as a whole. But as of now, aside from the support from the liquidity, banking sector stands very well in terms of capitalization, in terms of asset quality. We do not feel it is right time to think of making fresher capital injection to the banking sector. But what I can tell you here is that given the enormity of this current round of credit crunch around the world, we can not leave without having liquidity contingency plans, so we certainly have the clean place, the right kind of support mechanism to be used whenever it is needed. However, with the concerted efforts around the world, I’m certainly hoping that national environment re-stalls its calm.

Q: Mr. Jun, what is the addressing bank asset quality for just briefly here, what is the potential fall-out and your view from let’s say small and middle-sized enterprises, SMEs, construction companies, that may fail. What kind of default situation is the worst case in area that you considered?

A: As always, when economic downturn comes, relatively more vulnerable segment of borrowers and small and medium-sized enterprises, and relatively less credit-worthy borrowers, that’s always the case. Even so, in Korea, as of now, SME sector represents the delinquency rate is only around 1%. It’s not very high, nevertheless we have made some pre-emptive measures about 2-3 weeks ago to provide the government support, guarantee support so that banking sector can comfortably take on the risk on part of small and medium enterprises. In addition, this afternoon we will be making announcement to support the construction sector which is certainly another economic-cycle sensitive segment of economy. And that’s the main route caused of supply problems around the world actually. To provide issuer support for that segment, we are providing additional support. That will be announced this afternoon, and that will create for the comfort for the banking sector to observe a risk from small and medium enterprises. So I don’t really see this will be a burden of our banking system.

Q: We will see how the market gages, Mr. Jun. We are going to continue more with Jun Kwang-Woo from the FSC.

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Q: There is silver lining in every cloud no matter how dark it is, very often used clich&eacute; you may recall earlier in the year, the Korean Development Bank, KDB failed the attempt to buy the Lehman brothers. The thing we are looking at what happen to Lehman meaning the answers are here, the whole situation might be very very different indeed under the KDB umbrella. One more chat with the guest from the FSC, Financial Services Commission, Jun Kwang-Woo. Mr. Jun, is that the answer then for the question? You know, we back then the situation some of explosions among the financials, is that going to cause certain fortress Korea were to go up rather its money coming in or money going?

A: As you know, crisis creates opportunities, this maybe no exception to it. KDB certainly considers that possibility. All things are considered in terms of risk-rewarded structure, and more importantly, the characteristics and circumstances of the KDB that is currently in. Because we are about to privatize KDB, I thought it is not quite appropriate for KDB to be engaged in this kind of cross-border M&A deals at this particular juncture. So the deal didn’t go through. In some time not too distant futures, there will be a lot of activities around the world in the aftermath of current round of credit crunch. Then I think it will reshape the global financial architecture and also business paradigm.

Q: Certainly the time lines for privatization of KDB and other national banks that worry financial, IBK. Those are that you have to change your assumption. Have expectations you have inside?

A: You’re right, any privatization even though the direction is right, a lot of merits attached to it. But we have to be realistic about the absorptive capacity in the market place. So given all theses situations, and given the very low valuations of financial stocks around the world. This is not the right time to push hard. The pace of privatization of those companies that you are referring to, nevertheless we will stick to the regional plans to privatize all these institutions without much delay.

Q: Can you comment on the state of failures? Many businesses are finding themselves in, because of the rapid decent of the won like 38, 39 and 40 % over the course of loss in 2008. A lot of companies are seeing the very substantial losses because of the delivery risks, so we called kiko and you know what I’m talking about the knock-in and knock-out currency hedging. You know, what is your view on them? Did they engage in dangerous behavior or, you know, the government, as part of the overall liquidity and bail-out plans have to maybe address more this issue.

A: Well, I always think the derivative is something like a knife. It is useful when it could be a useful tool, but at the same time, if it is not used properly, it could be used as a weapon. Now it’s something like this as happened. Unfortunately, some of,, especially small and medium-sized enterprises, what has happened was that vast majority of corporations will engage in this derivative FX Hedge operations gained actually out of,, in hands to export revenues from depreciating Won, which was more than upset the loss incurred from this foreign exchange hedging instrument. But unfortunately, some are involved more heavily in this instrument of engagement. So far over-hedging themselves, in that case, certainly the given rapidity and magnitude of Won depreciation, they ended up losing quite substantial amount of money. All things are considerable. I think this is manageable situation, and a kind of government plans to support for small and medium-sized enterprises announced 2 weeks ago also covered this kiko related losses. And, of course, the actual losses will depend upon how Won moves from now to safe first half of next year much of the kiko contracts expired by that time. So we will se how it goes, but what I can tell you are the banking system can certainly absorb this level of losses.

Q: Do you feel runs whether it’s on banks or cooperatives or whatever or mutual funds, I mean, we’ve seen elements of these in many many places around the reason. What kind of safeguards do you haven’t placed systemic melt-down;. What sort of previsions does FSC have or envision put it in place?

A: I can mention two things. One, they’re certainly relatively more vulnerable segment now in financial systems. Namely savings in loans banks, relatively small banks, they’re more heavily exposed to project financing type of instruments. They are smaller, so they are less well-capitalized. We are encouraging some restructuring themselves, we didn’t industry as some cases with the government help and that will continue. I think that will reduce the overall risk in the system. The other one relating to any sort of uneasiness in the financial system,,,, maybe shown in the form of savings or funds. Now, of course, we don’t see that at the moment, but we are preparing the kind of measures that we can use whenever we feel it necessary so that we can protect our depositors and investors.

Q: Mr. Jun, pleasure to have you in the show with us today. Chairman, the South Korean FSC, Jun Kwang-Woo. Thank you.